Research Reports

Updated Dec. 6, 2004 12:01 a.m. ET

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The following companies are subjects of research reports issued recently by investment firms. Many of the reports may be obtained through the company research area of The Wall Street Journal Online at WSJ.com, or are available through Factiva.com. Share prices at the time the report was issued and the date of the report are in parentheses. Some of the reports' issuers have provided, or hope to provide, investment-banking or other services for the companies being analyzed.

Arotech
(ARTX-NNM) by Roth Capital Partners (1.78, Nov. 30) Sell. Arotech [a maker of defense- and security-related products] reported record third-quarter 2004 results earlier this month, with revenue of $16.3 million (+185.2% year-over-year) versus $5.7 million a year ago, well ahead of our estimate of $12.6 million. Following the reclassification of certain expenses, the company lost one cent, compared to our estimate of breakeven.

The restatement is related to the calculation of amortization of debt with a conversion feature that resulted in the understatement of amortization expense in fiscal 2003 and overstatement this year. The adjustments appear minor, with no bearing on the balance sheet or cash flow. The repricing of warrants and grant of new warrants are also now recognized below the income line as a non-cash, deemed dividend. In Q304, this expense was $2.1 million.

Adjusted Ebitda [earnings before interest, taxes, depreciation and amortization] turned positive this quarter, coming in at $1.9 million versus our estimate of $1.4 million. The unrestricted cash balance was $4.6 million. Due to a strategic decision to submit a lower bid to win an initial armor order in conjunction with an inventory-valuation adjustment...consolidated gross margin declined to 29% versus 43% in Q303. Excluding this charge of approximately $586,325, we estimate gross margin at 32.6%.

Gross margin may continue to face some downward pressure in Q404 due to an additional charge, and while these lower-priced vehicles ship. Factoring in near-term margin pressure and a cautious tone for the first half of '05, we are reducing estimates for Q404 and FY05 accordingly...Our price target is revised downward to $1 per share.

Electronic Boutique
(ELBO-NNM) by Southwest Securities (39.34, Nov. 30) GameStop
(GME-NYSE) by Southwest Securities (21.70, Nov. 30) We believe video-game industry sales were healthy over the Thanksgiving holiday. Overall, our checks indicate that sell-through was slightly ahead of expectations at specialty retailers Electronics Boutique (Strong Buy/High Risk) and GameStop (Strong Buy/High Risk). Even Wal-Mart, which lowered overall sales expectations for November, cited video games as among the strong categories for the month. We maintain a $45 price target for ELBO, based on 17 times our fiscal-year 2006 earnings-per-share estimate of $2.67, and a $26 price target for GME, based on 17 times our FY05 EPS estimate of $1.53.

Kohl's
(KSS-NYSE) by Think Equity (46.45, Nov. 30) October's sales 'shortfall' was certainly related to poor seasonal sales in the Midwest and we assumed (incorrectly, so far) that those sales would be recovered in November. Now it seems more likely that those sales will be recovered during the remainder of the season, if at all. Price target: $62.

Kohl's bought outerwear...with multiple, planned replenishments that the company is not committed to take in their entirety. This leaves Kohl's with enough goods to sell, should the weather turn cold, and the ability to get more if the weather turned cold soon. But it relieves the company of most of the ordinary exposure to markdowns on goods whose value declines as the season progresses.

Some investors pooh-poohed the 'weather explanation' -- by pointing to Kohl's assertion that its sweater business was good, even in the Midwest. But Kohl's sweater business was good only compared to its own sales last year, when its sweater assortment was particularly unappealing, or, as we noted, downright ugly...

We'd now guess that Kohl's will not make our most recent estimate of a November 6% comp-store increase, and this guess comes directly from the recognition that November was warmer than normal, [which] can be pretty cold in Milwaukee, Chicago and St. Louis, and outerwear sometimes sells into February, even if not at full price. Since the company was comfortable with its seasonal stocks, we do not expect markdowns will be in any way unusual.

A 4% November comp-store increase will more than suffice to support our investment thesis, especially if the number is as good as or better than others'. And since December's comp-store sales could easily reach 5% to 6%, even flattish comp-store sales in January would bring sales to our estimated increase of 17% to 18% for the quarter. Buy.

﻿MetLife
(MET-NYSE) by Clear Asset Management (39, Nov. 30) Reiterate Buy. MetLife is one of the largest life insurers in the U.S.; with a market cap near $30 billion, it is one of the largest companies in the Clear Large Cap Value Portfolio). Aside from a momentary drop in price during the first days of the insurance-company scandal in October, the firm's stock price has been on an upward trend all year, gaining 15% so far. We have owned MetLife for ten weeks now, with about a 3% gain.

The computer rates MetLife highly for a variety of reasons, beginning with its ability to be profitable each year for the last five. In the last year, the firm has generated a reasonable return on equity (ROE) of 12%, and [carries] a minimal level of long-term debt. Valuation-wise, MetLife is quite appealing, with a price/earnings ratio of 11; competitors in the life-insurance business average a P/E ratio of 12.

Because of its low long-term debt level and high liquidity, business risks to MetLife appear limited. However, the risk remains of regulatory investigations... Our computers do not predict the likelihood of these types of events. They do say, however, that given all available data, MetLife looks like a company that could generate upside, while its downside seems limited. As a risk-reward equation for our value portfolio, we find that appealing.

We are reducing our investment rating on WSFS to Market Perform based solely on valuation concerns. The stock has soared 12.1% over the past month and has climbed to within 4.4% of our price target. Our 2004 and 2005 EPS estimates remain unchanged at $3.41 and $3.92, respectively, as does our 12-month price target of $65.

Risks that the stock does not reach our price target include an unanticipated, sharp decline in interest rates; deterioration in the economy that could affect loan demand and credit quality; and a revaluation of the small-cap bank sector.

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